Overview of the Insurance Market for Inter-Korean Economic Cooperation

Demand for insurance necessary to manage risks arising from inter-Korean trade will likely increase as economic cooperation between the two Koreas is expected to grow in the wake of the inter-Korean Summit on April 27, 2018, which gave rise to the adoption of the Panmunjom Declaration for Peace, Prosperity and Unification of the Korean Peninsula. Future economic cooperation will boost resource development and infrastructure investment as well as facilitate the resumption of the Kaesong Industrial Complex in the North, one of the symbols of inter-Korean economic cooperation. Various risks will inevitably come with increased business activities and economic collaboration between the South and the North, and insurance will become an important tool for the management of such risks.

There are two types of insurance available for businesses engaged in economic cooperation projects: inter-Korean economic cooperation insurance and inter-Korean trade insurance. The former covers fixed assets such as factory and machinery equipment against risks related to the operation of a project, while the latter provides coverage for current assets such as stock inventory. As of late 2015, a total of 112 companies took out the former, and claims of KRW 294.5 billion were paid out to 104 insured businesses when the Kaesong Industrial Complex was shut down due to political reasons in 2016. Meanwhile, the latter was rarely used because there was a lack of demand and awareness of insurance needs and the subscription process was purportedly complicated.

However, the current insurance plans have a set of challenges to be addressed. First, as property and liability coverages are currently available by North Korean insurers only, South Korean insurance companies should be allowed to participate in underwriting risks so that the insurance program can be further expanded. Second, there is no business interruption insurance available as the existing insurance program mandates paid claims to be returned to insurers in case the suspended business operations are resumed. Third, the coverage limit of inter-Korean economic cooperation insurance, which is KRW 7 billion per business, is too low to cover actual losses incurred by businesses, given the nature of an insured loss event - low frequency and high severity. The amount of claims paid in 2016 when the industrial complex was closed was KRW 294.5 billion, or KRW 2.8 billion per business, far below the total actual losses estimated conservatively at KRW 777.9 billion.

<Estimates for Losses from the Suspension of the Kaesong Industrial Complex in 2016>